PARAGUAY: PRESIDENT DUARTE SUPPORTS CENTRAL BANK

C O N F I D E N T I A L ASUNCION 000495 SIPDIS SIPDIS STATE FOR, WHA/BSC, WHA/EPSC, EB/IFD/OMA NAIROBI FOR MICHAEL FITZPATRICK TREASURY FOR CKUSHLIS AND OTA STATE PASS USTR FOR MARY SULLIVAN USAID FOR AA/LAC ADOLFO FRANCO NSC FOR SUE CRONIN SOUTHCOM FOR POLAD BARBARA MOORE E.O. 12958: DECL: 05/10/2016 TAGS: ECON PREL EFIN PINR PA SUBJECT: PARAGUAY: PRESIDENT DUARTE SUPPORTS CENTRAL BANK PRESIDENT AGAINST OLD GUARD REF: A. A) ASUNCION 258 ¶B. B) ASUNCION 29 Classified By: ECON Patrick R. O'Reilly for reasons 1.4 (b) and (d). -------------- SUMMARY -------------- ¶1. (C) President Duarte has demonstrated with action his rhetoric supporting economic reform by forcing the resignation of three members of the Board of Directors of the Central Bank (BCP),handing a major victory to Monica Perez, BCP President, in what had been a bitter struggle between her and the Board of Directors. Perez had told the Ambassador in early March that she would resign if the impasse were not resolved. Perez will now run the bank with the one remaining Board member until new members are appointed, significantly improving her ability to manage the BCP. The end-game remains unclear, though, as one of the members may remain with the BCP where he might cause problems for Perez, and some in the opposition are clamoring both for Perez,s resignation and for the appointment of new Board members to counter her. Perez praised Duarte,s continued support for her, and told the Ambassador that he has kept to his promise never to ask her for special favors. As noted in ref B, Perez believes that public support by the CDA at a critical moment in early January was "decisive" in solidfying Duarte's support, which has fortunately played out with a win for a key reformer. End Summary. -------------- - CRISIS OVER - FOR NOW - AND BCP PRESIDENT WINS -------------- - ¶2. (C) The institutional crisis at Paraguay,s Central Bank described in reftels and previous reporting has been at least temporarily resolved with the late April resignation of the three Board members most at odds with Central Bank President Monica Perez. The resignations were offered based on pressure from President Duarte, a significant positive signal of his commitment to economic reform, and a follow through to an early January decision to support Perez following the CDA's well-publicized call on Perez (ref B). The President,s recent actions in support of Perez come in the face of bitter recriminations against Perez on the part of some within the opposition, as well as more nuanced opposition to her reforms from certain factions of the Colorado Party. As noted in ref A, Perez told the Ambassador in early March that she had told the President that she would resign if the impasse were not resolved quickly. Three of the Board members had been openly attacking Perez in the press, and hindering her reform efforts by blocking initiatives she presented to the Board for approval. ¶3. (C) The departure of the three Board members leaves only two: Perez as the President and Venicio Sanchez as the sole remaining regular Board member. Perez told the Ambassador in prior meetings and again on April 20 that Sanchez, who is a long-time BCP employee, was someone with whom she could work. She told Econcouns on April 27 that with the resignation of Fernando Silva Facetti (the last to go ) Raul Ayala and Diego Martinez resigned a week earlier),she was relieved and felt that she should be able to move forward now much more easily. After the three resignations, the ex-Directors and the press claimed that without the required three-member quorum, the BCP could not function. Perez, however, cited Article 21 of the BCP,s organic law, which allows the President, in times of emergency or expediency, to issue decrees unilaterally with only the requirement that the Board be notified after the fact. She pointed out that before she arrived, most resolutions were issued under that Article since the Board did not regularly meet. -------------- END-GAME UNCLEAR -------------- ¶4. (C) The end-game remains unclear, though. One of the Board members resigned from the Board, but not from the BCP itself, and if he continues to walk the halls at the Bank, Perez expressed concern he could stir up trouble. The history of using jobs at the BCP for patronage purposes and the current political impasse between the Colorado Party and the opposition creates questions with respect to the caliber of the individuals who will eventually be appointed the Board. Some opposition members have been saying they want new Board members who can counteract Perez. For now, President Duarte has said he will not negotiate those nominations with the opposition, but with the Congress not meeting regularly, the final outcome is in question. ¶5. (C) According to Perez, one of the Board members who resigned, Diego Martinez, is angling for a reward such as a posting as Paraguay,s representative to ALADI, where he could pull in a six-figure USD salary. She expressed her opposition to and frustration with the long-standing practice of rewarding opponents with cushy jobs. She noted, though, that Martinez has as cousin who is very close to President Duarte,s sister-in-law, who supports him in many things, and complicates the situation. Raul Ayala is very close to influential Colorado Senator Jose Galaverna, which could complicate an attempt to removing him completely from the bank. Perez told the Ambassador that all three ousted Board members had been involved with theft related to past bank failures. They all were in favor of handling the liquidation of seized assets in house, but Perez said she would much rather outsource such asset management and sale to an international firm. -------------- STRONG SUPPORT FROM PRESIDENT DUARTE -------------- ¶6. (C) Perez told the Ambassador that President Duarte has a good heart and fully supports her. She repeated the story that when Duarte asked her to take the job, he asked her to keep his offer a complete secret so he wouldn,t have to &negotiate8 her nomination. She said that even her family didn,t know until the President announced that she would be the next BCP President. Perez claimed that Duarte has never asked her to take specific actions on his or the Colorado Party,s behalf. She dismissed press allegations that relatively high inflation was somehow linked to the Colorado Party internal elections earlier this year. -------------- COMMENT -------------- ¶7. (C) Monica Perez,s efforts to eliminate the widespread practice of employees permanently receiving pay bonuses associated with certain jobs even after leaving those jobs, as well as her insistence that the monetary policy budget should be made transparent and included in the BCP,s annual budget submitted to Congress quickly earned her enemies on the Board of Directors and with certain members of Congress, both within the Colorado Party and the opposition. Post continues to believe she is truly committed to reform. A legal expert from Treasury,s Office of Technical Assistance conducted a legal analysis that fully supported Perez,s view regarding the monetary policy budget. President Duarte,s unflagging support for Perez despite the ongoing political impasse with the opposition is a strong indicator of his commitment to reform, at least on the economic front. As noted in ref B, Perez believes that public support by the CDA at a critical moment in early January was "decisive" in solidfying Duarte's support, which has fortunately played out with a win for a key reformer. CASON CASON